News of Note
Strathcona provided shareholders with a choice between receiving a PUC distribution or a taxable dividend
Email this ContentStrathcona intended to distribute $2.14 billion of the proceeds from the sale of its Montney assets. It determined that not all shareholders would prefer to receive the distribution as a PUC distribution rather than as a taxable dividend. Accordingly, shareholders were given the choice.
Electing shareholders could opt to receive a PUC distribution. This was achieved through a s. 86 exchange under the Alberta plan of arrangement of their common shares for (newly-created) Class A common shares of Strathcona, the receipt of the PUC distribution on their Class A common shares and the subsequent s. 86 exchange of those Class A common shares back for their original common shares. (In the brief interim, the common shares had been temporarily held in treasury by Strathcona rather than being cancelled.) The Class A common shares had identical attributes to the common shares, except that they were convertible into common shares and entitled to an additional day's notice of any shareholder meeting.
One or both of the following bases was identified for considering that s. 84(4.1) did not apply to the PUC distribution. First, the special distribution was paid in connection with the reorganization of Strathcona's business into a pure-play heavy oil company and the discontinuance of its Montney business segment. Second, it represented the one-time and prompt distribution of the proceeds received by the Company on the Montney asset sales.
Shareholders who did not elect to receive the PUC distribution retained their common shares and received an equivalent taxable dividend instead, which was subject to Part XIII tax in the case of non-residents.
For U.S. tax purposes, the exchange of common shares into and back out of Class A common shares were treated as transitory steps that should be ignored, so that there was considered to be a taxable distribution, subject to the possibility in the case of non-corporate U.S. holders of being treated as a partial liquidating distribution and, therefore, as a redemption transaction.
Neal Armstrong. Summary of Management Information Circular of Strathcona Resources Ltd. (“Strathcona” or the “Company”) regarding a special distribution pursuant to a Plan of Arrangement under Spin-offs and Distributions – Other – S. 84(4.1)(a) and (b) distributions.
CRA reverses its longstanding position that MFT trailer fees are GST/HST exempt
In a GST/HST interpretation dated December 22, 2025, CRA stated:
Based on our review of the industry's current regulations and practices, our position has changed. Effective July 1, 2026, mutual fund trailing commissions paid by managers to both original dealers and new dealers will generally be subject to GST/HST.
CRA indicated that the current practices of dealers and agents suggest that they provide ongoing taxable services to their clients in exchange for the trailing commissions, as opposed to the exempt service of assisting with the issuance of the mutual fund units. This reverses its longstanding position (see, e.g., 13 January 2022 GST/HST Interpretation 187184) that “where under the distribution agreement between the dealer and manager, the dealer is also entitled to receive ongoing amounts as a trailing commission, this amount would ordinarily be viewed as additional consideration for the supply of the financial service of arranging for the sale of shares or units.”
Neal Armstrong. Summary of EY Tax Alert, 2026 No. 1, 12 January 2026 “Reversal of longstanding position with respect to the GST/HST status of trailing commissions” under ETA s. 123(1) – financial service – (l).
CRA rules on the non-application of SIFT tax to REIT’s subsidiary LP issuing exchangeable units to tax-exempt
A REIT (i.e., a listed unit trust qualifying as a REIT for ITA purposes) indirectly purchased a property from a Canadian-resident tax-exempt corporation on the basis that such vendor would effectively take back a convertible preferred share for part of the purchase price. This was accomplished by an affiliate of the vendor, which was also a tax-exempt resident corporation (the “Vendor Affiliate”), subscribing for preferred units of a newly formed subsidiary limited partnership (“New LP” – the property purchaser), which was held directly and indirectly by the REIT.
The preferred units bore a fixed per-unit distribution entitlement on their face amount and were exchangeable, based on a largely fixed exchange ratio, at the option of the Vendor Affiliate into REIT units. At the closing time, the FMV of the REIT units, into which the preferred units were exchangeable, was substantially lower than the face amount of the preferred units. Furthermore, the purpose of the preferred units’ exchange rights is stated to be “not to create an instrument that replicates the return on or value of a … REIT Unit.”
CRA ruled that the holding of the preferred units by the Vendor Affiliate would not cause New LP to be a SIFT partnership. This ruling turned on the proposition that the preferred units did not represent “investments” in a publicly-traded entity, i.e., the REIT. The s. 122.1 “investment” definition relevantly refers to “a right that may reasonably be considered to replicate a return on, or the value of, a security of the trust.” The CRA summary simply states that this was not the case “because there is no replication.”
There was no blandishment that New LP was an “excluded subsidiary entity,” which would have depended on satisfying the more onerous test that the preferred units were not “property, the value of which is determined, all or in part, by reference to a security that is listed or traded on a stock exchange.”
The terms of the preferred units contemplated that, to the extent possible, the annual allocations of taxable income thereon would represent the same proportion of the distributions thereon as for the REIT units. It was stated that this was “intended to provide assurance that the [transactions] … have not been … entered into to circumvent subsection 104(7.1).”
Neal Armstrong. Summary of 2024 Ruling 2023-0997921R3 under s. 122.1(1) – investment – (a)(ii).
Essaris Estate – Court of Quebec vacates gross negligence penalties imposed for treating condo business profits allocated to the taxpayer as capital gains
The taxpayer transferred vacant land, on a rollover basis under s. 73(1) and the Quebec equivalent, to a trust which, in turn, transferred the land on a rollover basis to a newly formed condominium development limited partnership (SEC) with a third party in consideration for a 50% limited partnership interest.
Although SEC reported the proceeds from condominium sales as business profits, the taxpayer treated his share of such profits (allocated to him via the trust) as capital gains. Choquette JCQ affirmed the ARQ reassessments to treat the amounts as ordinary income to the taxpayer, but vacated the gross negligence penalties on the basis that the ARQ had not demonstrated the high degree of negligence required to sustain such penalties.
Neal Armstrong. Summary of Succession de Essaris v. ARQ, 2025 QCCQ 8065 under s. 163(2).
CRA confirms that where two share classes are inter-convertible, a capped liquidation entitlement for one class will cause both to be non-prescribed shares under Reg. 6204(1)(a)(iii)
Class X shares of a corporation were convertible at the holder’s option into Class Y shares of the corporation, and those Class Y shares, in turn, were convertible at the holder’s option into Class X shares. On a winding up, holders of Class Y shares were entitled to an amount determined according to a formula in the articles, and no more. Consequently, the Class Y shares did not comply with Reg. 6204(1)(a)(ii) (i.e., their liquidation entitlement was capped) and, therefore, were not prescribed shares.
The question posed was whether the circular conversion attributes of the two classes caused the Class X shares to also not qualify as prescribed shares, notwithstanding that the rights of a Class Y shareholder were indirectly the same as those of a Class X shareholder by virtue of the conversion right.
The Directorate confirmed that the right to convert Class X shares into Class Y shares did not comply with Reg. 6204(1)(a)(iii) (because the Class Y shares were not prescribed shares), so that the Class X shares also were not prescribed shares. It stated that in light of the circular nature of the conversion rights, both Class X and Class Y shares must meet the requirements of Reg. 6204(1)(a)(iii), which was not the case here.
Neal Armstrong. Summary of 25 August 2025 Internal T.I. 2023-0974491I7 F under Reg.6204(1)(a)(iii).
Income Tax Severed Letters 7 January 2026
This morning's release of four severed letters from the Income Tax Rulings Directorate is now available for your viewing.
Shopify – Federal Court of Appeal prohibits Shopify from deleting inactive accounts within the scope of appealed s. 231.2 requirements
Shopify (2025 FC 969) refused the authorization pursuant to s. 231.2(3) (and its ETA equivalent) of requirements for Shopify to provide information regarding certain persons who used the Shopify software platform to sell products and services online, given that the requirements’ wording were too vague and confusing for there to be an ascertainable group and because they were disproportional.
In connection with an appeal of that decision to the Court of Appeal, the Minister brought this motion for a preservation order that would prevent Shopify’s policy of deleting data from inactive accounts after two years from affecting accounts within the scope of the proposed requirements.
In authorizing this request (on modified terms), Goyette, J.A., noted that, in accordance with the RJR-MacDonald three-part test for granting an interlocutory injunction:
- There was a serious issue to be tried (although applicants for mandatory interlocutory injunctions must show a strong likelihood of success, here the substance of the proposed preservation order instead was to require Shopify to refrain from deleting information rather than to take any affirmative action).
- Without the order, the public interest would suffer irreparable harm (not granting the order would result in inactive accounts being deleted, thereby marring CRA verification of compliance, and this public interest should not be prejudiced by the two-year delay of the Minister in bringing this application); and
- The balance of convenience favoured the public interest (harm to Shopify in having to comply with the order was not demonstrated to be substantial, provided that the terms of the preservation order adopted restrictions respecting the included accounts that were apparent from a review of the Federal Court’s judgment).
Neal Armstrong. Summary of Minister of National Revenue v. Shopify Inc., 2025 FCA 232 under s. 231.2(3).
CRA indicates that a taxpayer generally can file a s. 45(3) election at any time up to the filing-due date for the year of the property’s “actual” disposition (including under s. 70(5))
In 2014, the taxpayer converted his income-producing property to his principal residence and, in 2017, he filed an election under s. 45(3) respecting that change of use – but in 2020 filed a T1 adjustment request requesting the rescinding of the election and reporting a capital gain arising from the 2014 change in use.
CRA noted that (in the absence of a Ministerial demand for the election), the election was required to be made by the taxpayer’s filing due date for the taxation year in which the property was actually disposed of by the taxpayer. Since the taxpayer filed the s. 45(3) election by the filing-due date for his 2017 return and, in 2017, he had not yet actually disposed of the property, the election had been timely filed.
Regarding the 2020 request, the revocation of the election could be permitted pursuant to s. 220(3.2) by the Minister. If accepted, the taxpayer would not be liable to a penalty under s. 220(3.5), as the revocation was made prior to the election’s due date.
Where the taxpayer had instead died in 2019, without having yet filed the s. 45(3) election, the date “the property is actually disposed of by the taxpayer” under s. 45(3) is considered to be the date of the deemed disposition of the property on the taxpayer’s death pursuant to s. 70(5). Therefore, the relevant filing due date for making the election would have been that for 2019 terminal return.
Neal Armstrong. Summary of 26 September 2025 Internal T.I. 2022-0923881I7 under s. 45(3).
CRA indicates that on a life insurance policy’s gratuitous transfer to a shareholder/executive, the policy’s ACB to that individual is increased by the excess of the policy’s FMV over the deemed s. 148(7) proceeds
A corporation, which was the owner and beneficiary of an insurance policy on the life of an individual who was a senior executive officer and a shareholder, transferred the policy to the executive upon retirement for no consideration. The policy particulars were:
- Death benefit: $1,000,000
- Adjusted cost base (ACB): $100,000
- Cash surrender value (CSV): $50,000
- Fair market value (FMV): $125,000
CRA confirmed that on such disposition, the corporation was deemed under s. 148(7) to receive proceeds of disposition equal to $100,000, being the greatest of the $50,000 CSV, the nil FMV of the consideration and the $100,000 ACB. Consequently, pursuant to s. 148(1), the corporation did not realize a policy gain (over the $100,000 ACB); and pursuant to s. 148(7)(b), the individual was deemed to acquire the policy at a cost equal to such deemed proceeds of $100,000. If the policy was received qua shareholder, there would be an income inclusion to the individual of $125,000 pursuant to s. 15(1); and if received qua employee, there would be an income inclusion of the $125,000 under s. 6(1)(a), with a corresponding deduction available to the corporation.
Additionally, there would be a further addition to the ACB of the policy to the individual (pursuant to variable C of the definition respecting “an amount in respect of the disposition of an interest in the policy … that was required to be included in computing the policyholder’s income”), equal to the excess of the FMV of the policy over the deemed proceeds of disposition under s. 148(7)(a), namely, of $25,000 ($125,000 FMV - $100,000 deemed proceeds), thereby increasing the ACB to $125,000.
Regarding the reporting requirements of the insurance company under Reg. 217(2), CRA stated:
Although not a party to the disposition, we would expect an insurer to be aware of any changes to the policyholder arising from a disposition of a life insurance policy to ensure that the policy continues to be in effect and make any necessary adjustments to the ACB as appropriate.
Neal Armstrong. Summary of 18 September 2025 CLHIA Roundtable Q. 6, 2025-1067961C6 under s. 148(9) – adjusted cost basis – C and s. 148(7).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in December of 1999. Their descriptors and links appear below.
These are additions to our set of 3,418 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 26 years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
Neal H. Armstrong editor and contributor